MILAN—Italian lender
Intesa Sanpaolo
ISNPY 3.03%
SpA said Tuesday its second-quarter net profit dropped slightly, mainly due to higher loan-loss provisions which were only partially offset by a one-off capital gain and a lower tax bill.

Net profit slipped to €901 million ($1.01 billion) from €940 million for the same quarter a year earlier. Revenue rose to €4.61 billion from €4.51 billion.

However, the bank posted declines in most of its revenue lines, illustrating the struggle of Italian banks to increase their profitability in an environment of low to negative rates, while bad loans still weigh heavily of their results.

Huge piles of bad loans erode large chunks of local banks’ revenue on a quarterly basis, while ultralow and negative rates have been pushing down their margins on lending, a fundamental component of Italian banks’ revenue.

Italian banks, especially Intesa, tried to compensate for such declines by betting on revenue-generating businesses, such as asset management and insurance. But results have been patchy across lenders and quarters.

Intesa’s results come at a time of heightened concerns about the health of the sector after two large Italian banks fared poorly in a Europe-wide stress test of lenders carried out by the European Banking Authority, whose results were unveiled Friday.

Analysts expect most large banks to post lower results this week, signaling the difficulty of Italian banks to get past a mix of huge exposures to bad loans, chronically low profitability and high costs—a set of problems compounded by ultralow and negative interest rates and market turbulence.

Intesa’s shares dropped following the release of its results, shedding 3.6% in midafternoon trading. All Italian banks’ shares were accumulating large losses on Tuesday, with
Banca Monte dei Paschi di Siena
Spa down 12% and
UniCredit
SpA off 7.8%.

“I think there is a misperception of the situation in Italy. The way foreign investors look at Italy is not correct,” Intesa’s Chief Executive Carlo Messina told analysts. “If you are a good bank you can make money in Italy. We are the evidence.”

Intesa’s provisions for bad loans rose 9% to €923 million, or one-fifth of its revenue, compared with the same period of last year. The bank said it has set aside cash to cover 61% of its worst bad loans and that the half-yearly inflow of bad loans was at its lowest level since 2007.

The net interest margin dropped by 6% to €1.83 billion for the quarter compared with the same three months of last year, while net fees and commissions were down 5% to €1.85 billion.

These declines and the higher provisions for losses on loans were offset by a capital gain of €170 million the bank booked on the sale of its stake in VISA Europe. The bank also said its tax bill for the quarter dropped by about one-third to €340 million.

The bank confirmed its commitment to pay €3 billion in dividends this year, while Mr. Messina said he plans to increase the dividend payout for 2017 to €4 billion.